IN-DEPTH: The effects of House, Senate tax cut proposals

Jun. 12, 2013

Cleaner Concepts owner Andrew Pappas, with stores in Anderson Township and Hyde Park, says he would drop his salary and take the business' profits as income to save roughly $2,000 if the Senate's tax-cut plan passes. / The Enquirer/Leigh Taylor

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Which plan is better for you?

Senate

• If you earn $25,000 from a business, you’d save about $350 in taxes. That would buy a 36-foot extension ladder. • If you earn $80,000 from a business, you’d save about $1,500 in taxes. That would buy a small refrigerator to hold drinks by a check-out counter. • If you earn $750,000 from a business, you’d save about $22,000 in taxes. That’s enough, depending on compensation, for a new employee.

House

• If you earn $20,000 in personal income, you’d save about $30. That would buy a nice dinner out for one. • If you earn $50,000 in personal income, you’d save about $100. That would buy four upper-deck seats at the Reds-Giants game July 4. • If you earn $100,000 in personal income, you’d save about $200. That would buy a low-end cruiser bicycle.

What’s up next in the state budget Process

• Today: The Ohio House is expected to vote to reject the Senate’s version of the state budget. The House and the Senate will then each send three representatives– likely two Republicans and one Democrat from each body – to a committee tasked with reconciling the House and Senate budgets.

• June 25: Possible target for committee to release final budget compromise.

• June 27: Possible target for House and Senate votes on final budget. Once it passes, the budget will go to Gov. John Kasich for any line-item vetoes and a signature.

• June 30: Deadline for Kasich to sign budget.

• July 1: New two-year state budget takes effect.

More

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Mike Siska doesn’t like to pay taxes. No one does.

But the Ohio House of Representatives’ proposed 7 percent personal income tax cut would only save the downtown Cincinnati resident $100 a year.

That’s one reason the Ohio Senate has a different idea: Instead of cutting taxes a bit for all Ohioans, Senate Republicans have proposed essentially a 50 percent tax cut on business owners’ first $750,000 in income.

The two General Assembly houses will start to meet this week to hash out their tax plans, a key difference in their two versions of the state budget scheduled to take effect July 1.

Democrats have said neither plan would reduce taxes enough to make a noticeable economic difference. For instance, they say, even the Senate’s tax cut won’t be enough for most business owners to add new employees.

Raymond Schneider, 62, owns Red Dog Pet Resort & Spa in Madisonville and other businesses that include nursing homes and self-storage facilities. His businesses net him a seven-figure income, he said, so he’d save the maximum amount any business owner could save under the Senate plan – about $22,000. Even that comparably small amount would make a difference, he said.

“My money’s always gone back into the business. I have completely repainted. I have improved my (dog) park,” the Blue Ash resident said of his upscale pet daycare and boarding business. “I hire more people if my business looks good and I can sell that business to my prospective client.”

RESTAURATEUR: 'I WOULD NOTICE IT'

Still, many business owners wouldn’t see as much benefit as Schneider. For starters, an estimated 15 percent to 30 percent of business owners have set up their businesses to pay them a salary, rather than booking the businesses’ profits as their personal income, said Gary Gudmundson, spokesman for the Ohio Department of Taxation. Those business owners wouldn’t qualify for the Senate’s tax cut.

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For those who do qualify, the Senate tax cut would allow business owners to pay taxes on only half of their first $750,000 in income. But many earn much less than that. Roughly 80 percent of U.S. small-business owners either report a tax loss or earn less than $25,000, according to a 2011 report by the U.S. Office of Tax Analysis, which studied 2007 data.

Bonnie Sturgill makes about $90,000 running From Scratch Restaurant and Catering in Bethel. She’d save about $1,800 under the Senate tax cut, which she says she’d probably use to upgrade equipment or remodel.

“I would notice it, because I’m a small business,” said Sturgill, 52. But she wouldn’t save enough to add an employee, she said.

That’s one concern Democrats have – that the tax cut isn’t likely to prompt the creation of new jobs. Both the House and Senate proposals will reduce Ohio’s tax revenue by about $700 million a year.

That money could be spent in ways that better help the economy, said Sen. Tom Sawyer, D-Akron, the ranking Democrat on the Senate Finance Committee.

Senate Republicans insist even a small tax break for business owners will lead to economic growth, “whether a small business owner chooses to upgrade equipment, give an employee a raise or possibly add a new worker,” Sen. Scott Oelslager, R-North Canton, chairman of the Senate Finance Committee, said Thursday in a Senate speech.

But Republicans in the House had a different idea of the preferred way to encourage the economy to grow. When they created their budget plan this spring, they wanted to keep cutting Ohio’s personal income-tax rate for everyone, building on decreases of 21 percent that started in 2005.

This year, Ohio’s top-bracket rate of 5.925 percent is higher than 22 other states, according to the Tax Foundation, a research group in Washington.

That tax cut affects Siska, the downtown Cincinnati resident. He owns his own business: Ideal Cards and Coins in Green Township. But he’s set up to earn a $50,000 salary from the business, so he said he wouldn’t qualify for the Senate tax cut.

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The about $100 in taxes he’d save from the House plan “is not a big deal,” he said. “I package up all of my stuff every month, I give it to my accountant and then it’s out of my brain.”

Instead, he’d rather see legislators focus on other tax changes, such as lowering business licensing fees.

Siska’s $100 in savings is huge compared with what many Ohioans would receive.

In 2011, the most recent year on file, more than half of Ohio tax returns reported income of $40,000 or less. Those Ohioans would save $11 to $50 annually under the House tax cut, according to data from the Department of Taxation.

I COULD SPEND $2,000 BETTER THAN THE GOVERNMENT COULD'

Still, it’s a start, said economists at the Tax Foundation, which generally supports lower taxes. The Senate’s 50 percent tax cut sounds great, economist Scott Drenkard wrote in an analysis, but in reality only growing firms create jobs.

“These businesses are exceptionally hard to target with tax preferences,” he said. The Senate plan “even phases out the small business deduction after the firm reaches an arbitrary size.”

If anything, he wrote, the Senate plan might encourage some entrepreneurs to restructure their business so that they can file their profits as personal income instead of taking a salary.

That’s exactly what Andrew Pappas will consider if the General Assembly passes the 50 percent tax cut for business owners.

His two Cleaner Concepts dry cleaning businesses in Hyde Park and Anderson Township are structured to pay him a salary with the businesses’ profits. But he’d save roughly $2,000 under the Senate bill if he recorded the profits as part of his income instead.

“I know I could spend $2,000 better than the government could,” said Pappas, 47. With the savings, he might expand his workers’ hours or upgrade equipment.

The House is expected to meet today to reject the Senate’s amendments to the budget bill, including the 50 percent business-tax cut, setting up about two weeks of deliberation by a six-member committee of House and Senate leaders.

If final tax revenue estimates come in higher, Senate leaders have said they hope the final bill will include both tax cuts.

The joint-tax-cut strategy more closely approximates the tax cuts originally proposed by Gov. John Kasich.

Along with suggesting a 20 percent cut in personal income taxes and the 50 percent cut for business owners, Kasich had espoused two controversial revenue-raising measures: applying sales taxes to some services and increasing taxes on fracking.

Last week, Kasich renewed his efforts to pass a tax on fracking, in which oil and natural gas are produced by breaking up shale. In his new proposal, 25 percent of that revenue would go back to eastern Ohio and the rest would enable tax cuts. ■